India: A Smart Investment Choice?

India is the world's third-largest economy and has a lot going for it. It has a massive population, a democratic system, a growing middle class, and a technically skilled workforce. However, it also has its challenges, including restrictive laws on foreign investment, a weak currency, and high levels of corruption and poverty. So, should you invest in India? Let's explore the arguments for and against.

India's economic growth and market performance

India's economy is a developing mixed economy with a notable public sector in strategic sectors. It is the world's fifth-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP). India's overall economic growth has been positive in recent years, with an estimated GDP growth of 8.2% in 2023-24. The country has a large youth population, with the largest adolescent and youth population in the world, which is expected to make up 42% of its population by 2030.

India's infrastructure story is also promising, with the National Infrastructure Pipeline initiative aiming to attract investments and provide world-class infrastructure. The country has identified nearly 9,700 projects across different sectors, totalling more than $3 trillion in investments. Sectors such as energy, roads, urban development, and railways will account for around 71% of the projected infrastructure investments.

In terms of market performance, the Indian stock market has shown resilience, with major indices like the Sensex and Nifty 50 delivering average annualised returns of 10% to 12% over the past five years. The market has navigated global economic uncertainties and challenges such as the Covid-19 pandemic, inflation, and geopolitical tensions.

Looking at specific sectors, electricals and renewable energy, infrastructure and construction, banking and financial services, automobile and auto ancillaries, and IT and software services are all expected to offer solid growth potential.

Overall, India's economic growth and market performance present a positive outlook for investors, with a mix of resilient sectors and long-term growth opportunities.

The Indian rupee's depreciation

Should You Invest in India?

The Indian rupee has experienced depreciation, or a decline in value, against major foreign currencies, most notably the US dollar. This shift can be attributed to various economic, political, and global factors, and it has significant implications for India's economy and trade relationships.

Causes of the Depreciation

The depreciation of the Indian rupee has multiple causes, including:

• Trade Deficit: India's trade deficit has expanded, reaching over $23 billion in November due to increased imports, especially rising oil prices, which impact the country's import bill.
• Policy Differences: The US Federal Reserve's low-interest rates and optimistic outlook for the US economy have strengthened the US dollar, while the Reserve Bank of India (RBI) has implemented tighter monetary policies to combat inflation.
• Reserve Accumulation: The RBI has been purchasing US dollars to bolster foreign exchange reserves and prepare for potential economic downturns, contributing to rupee depreciation.
• Global Factors: Events such as the Russia-Ukraine conflict, rising crude oil prices, and tightening global financial conditions have created uncertainty and led to capital flight from emerging markets like India.
• Oil Imports: India's heavy reliance on oil imports, coupled with high crude oil prices, exerts downward pressure on the rupee's value as importers demand more US dollars.
• Equity Market Volatility: Concerns over the Omicron variant and other global factors have contributed to market turbulence, impacting the value of the rupee.

Impact on the Indian Economy

The depreciation of the Indian rupee has a significant impact on various sectors of the Indian economy:

• Import Costs: A weaker rupee makes imports more expensive, affecting both consumers and industries that rely on imported goods and services, particularly in the oil and gas industry, where imports account for more than 85% of oil and 50% of gas used.
• Inflation: The increased cost of imports contributes to domestic inflation, reducing consumers' purchasing power and disrupting economic stability.
• Current Account Deficit: Depreciation leads to a wider current account deficit, which India already struggles with.
• Export Benefits: A weaker rupee can make Indian exports more competitive globally, benefiting export-oriented industries such as pharmaceuticals and information technology (IT).
• Foreign Investments: Depreciation may lead to a decline in foreign investments, impacting India's financial markets and capital flows.
• Interest Rates: The RBI faces challenges in maintaining low-interest rates as depreciation can introduce imported inflationary pressures, making it difficult to balance economic growth and price stability.

Measures to Address Depreciation

To mitigate the effects of rupee depreciation, policymakers can consider the following strategies:

• Encourage Foreign Investments: Attracting foreign central banks, sovereign wealth funds, and endowment funds to invest in Indian government bonds can help stabilize capital flows and strengthen the rupee.
• Strategic Use of Foreign Exchange Reserves: The RBI can sell foreign currency reserves to stabilize the rupee's value and manage currency volatility.
• Promote Exports and Reduce Import Dependency: Increasing export incentives and boosting domestic manufacturing can improve India's trade balance and reduce pressure on the rupee.
• Promote Use of Rupee in International Trade: Reducing the demand for US dollars in international trade transactions can stabilize the rupee's value globally.
• Attract Non-Resident Indian (NRI) Investments: Encouraging NRIs to invest in India and offering attractive interest rates on their deposits can increase foreign currency inflows.
• Effective Interest Rate Management: The RBI should focus on managing interest rates to balance economic growth and inflation control, aiming for a sustainable equilibrium.

India's Investment Potential

Despite the challenges posed by rupee depreciation, India remains an attractive investment destination. It is one of the world's fastest-growing economies, with a large and growing youth population, a rising global competitiveness ranking, and significant infrastructure development initiatives.

The country has also witnessed strong sectoral performance, particularly in electricals and renewable energy, infrastructure and construction, banking and financial services, and automobile and auto ancillaries.

In conclusion, while the depreciation of the Indian rupee has certain negative consequences, it also presents opportunities for export-oriented sectors and highlights the important role of the RBI in managing currency volatility and ensuring economic stability. India's overall economic prospects and sectoral strengths continue to make it a compelling investment destination.

Foreign investment laws and property ownership restrictions

Foreign nationals who intend to buy property in India are advised to seek the assistance of a local law firm. Foreign nationals, regardless of residency, cannot buy property in India unless they meet the residency requirement of 182 days in a financial year. It is illegal for them to own property in India or to purchase property on a tourist visa. Foreigners can buy property in India but are subject to clear residency rules and are prohibited from buying property in certain countries.

The Foreign Exchange Management Act (FEMA) and associated guidelines regulate foreign property ownership in India. The Reserve Bank of India (RBI) is responsible for monitoring and regulating the transfer and acquisition of immovable property by foreign nationals. The RBI has implemented measures to facilitate foreign property ownership while ensuring legal compliance and safeguarding the country's interests. These regulations outline eligibility criteria, property types that can be purchased, documentation requirements, and procedures for the acquisition process.

Foreign individuals who wish to purchase property in India must be either Non-Resident Indians (NRIs) or Persons of Indian Origin (PIOs). NRIs are Indian citizens residing abroad, holding Indian passports, and may have acquired foreign citizenship. PIOs are individuals who or whose ancestors held Indian citizenship but have since acquired the citizenship of other countries. Both NRIs and PIOs can buy residential and commercial properties in India without restrictions.

Foreign nationals who are not NRIs or PIOs may face restrictions and conditions when purchasing property in India. They may need to obtain specific permissions and follow guidelines set by the RBI or other regulatory authorities. Foreigners, including NRIs and PIOs, are generally prohibited from directly acquiring agricultural land in India. However, there are exceptions for PIOs who have inherited or received agricultural land as a gift. In such cases, they are allowed to hold and transfer agricultural land according to regulations specified by state governments.

Foreigners residing outside of India who do not have Indian citizenship can buy property in the country if they fulfil certain conditions, such as having stayed in India for at least 182 continuous days in the previous financial year. Foreigners residing in India with valid long-term visas or resident permits are also eligible to purchase property, provided they adhere to specific conditions, such as using the property for residential purposes only.

The process of purchasing property in India as an NRI involves several steps, including documentation, approvals, and registration. NRIs must conduct thorough research on market trends, select a property, obtain a PAN card, appoint a legal advisor, finance the purchase, register and execute the sale, and comply with authorised dealer banks.

India's debt problems and rising public debt

India is one of the world's fastest-growing economies, with a total FDI inflow of $1,013.45 billion from April 2000 to June 2024. The country has the world's largest youth population, with an expected increase from 121.1 Cr to 152.2 Cr people between 2011 and 2036. India also has the third-largest group of scientists and technicians globally.

However, India's national debt amounted to around $2.37 trillion in 2021, with projections showing a significant increase each year. This debt is almost 70% of its GDP, and it is rising alongside the country's economic growth. India's liabilities have increased significantly, and forecasts show no signs of this trend stopping. The country has been investing and borrowing money from commercial banks and non-banking finance companies.

Despite the increasing national debt, India's debt as a share of its GDP is predicted to decrease in the long run, along with its trade deficit. The country's economy showed robust growth in 2023, with an estimated GDP growth of 8.2%.

India's public debt-to-GDP ratio has shown minimal fluctuations, according to the country's executive director at the IMF, KV Subramanian. However, the IMF's data indicates that government debt has increased to alarming levels of 82.4% of GDP, which is a red risk marker in economic crisis terminology.

The rise in government debt is correlated with higher military expenditure and a decrease in spending on essential social and welfare services for human capital development. The weak Gross Fixed Capital Formation numbers reflect this, indicating that the government's borrowing and spending are not attracting private capital investment for growth.

India's debt crisis is characterised by high debt, low employment, and high food inflation, which is a challenging scenario for an emerging market. The country's manufacturing production is weak, and competitiveness in the services sector does not yield higher wages. Credit expansion in the financial sector is vital for the growth prospects of a large emerging market, but a higher debt level and lower growth cycle will leave less space for long-term credit expansion or borrowing.

To address these challenges, the Indian government needs to take serious fiscal consolidation measures instead of living in denial and refuting the IMF's cautions.

Corruption and governance risks

India presents a challenging risk landscape for foreign investors, with corruption and fraud being significant issues. Transparency International's 2023 Corruption Perceptions Index scored India 39 out of 100, with 0 being "highly corrupt" and 100 being "very clean". This score places India 93rd out of 180 countries, indicating a high level of corruption.

Prevalence of Corruption

Corruption is prevalent in various sectors in India, including the judiciary, police, public services, and public procurement. The country's complex bureaucracy, with its opaque processes and discretionary powers, provides ample opportunities for corrupt practices such as bribery and facilitation payments.

Impact of Corruption

Corruption has several negative consequences for India's economy and society. It discourages foreign investment, hinders economic growth, and results in inefficient institutions. Additionally, it leads to a lack of quality in public services, improper justice, and health and hygiene issues.

Reasons for Corruption

There are several factors that contribute to the prevalence of corruption in India:

• Lack of transparency in government processes and decision-making.
• Weak institutions, such as law enforcement and oversight bodies, that fail to hold individuals accountable.
• Low salaries for public officials, especially in lower-ranking positions, which make them more susceptible to bribery.
• Burdensome bureaucratic procedures and excessive regulations that drive individuals to engage in corrupt practices to expedite processes.
• Political interference in administrative matters, compromising the autonomy of government institutions.
• Cultural acceptance of corrupt behaviour in certain contexts.
• Inadequate protection for whistleblowers, deterring individuals from reporting corruption.
• Social and economic disparities that allow individuals with wealth and power to engage in corruption without repercussions.

Legal and Regulatory Frameworks to Fight Corruption

India has several legal frameworks in place to address corruption, including:

• The Prevention of Corruption Act, 1988, which provides penalties for corruption by public servants and those involved in abetting corruption.
• The 2018 amendment to this Act criminalised both bribe-taking by public servants and bribe-giving by any person.
• The Prevention of Money Laundering Act, 2002, which aims to prevent money laundering and prohibits the use of proceeds from criminal activities.
• The Companies Act, 2013, which provides for corporate governance and addresses corruption and fraud in the private sector.
• The Indian Penal Code, 1860, which includes provisions that can be interpreted to cover bribery and fraud matters.
• The Benami Transactions (Prohibition) Act, 1988, which prohibits individuals from claiming property acquired in someone else's name.
• The Lokpal and Lokayuktas Act, 2013, which establishes an ombudsman to inquire into allegations of corruption against certain public functionaries.

Frequently asked questions